Tape 89 - Have Monetary Policies Failed? Monetary and International Developments
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| - | Hello, this is Rose Friedman, | 0:02 |
| inviting you on behalf of Instructional Dynamics | 0:04 | |
| to another of our bi-weekly interviews | 0:07 | |
| with Dr. Milton Friedman, | 0:09 | |
| Professor of Economics at the University of Chicago. | 0:11 | |
| We are taping this interview | 0:14 | |
| on Sunday, December 26, 1971. | 0:18 | |
| - | We are taping this interview a few days early | 0:20 |
| because we are leaving this afternoon | 0:23 | |
| to go down to New Orleans, | 0:25 | |
| to attend the meetings | 0:28 | |
| of the American Economic Association, | 0:29 | |
| which are held every year in the period | 0:31 | |
| between Christmas and New Year's. | 0:33 | |
| I'm scheduled to talk at the meetings at a session | 0:37 | |
| on Have Monetary And Fiscal Policies Failed? | 0:40 | |
| I thought you might be interested | 0:44 | |
| if I started our tape today | 0:46 | |
| by reading a few paragraphs from the paper | 0:51 | |
| I've prepared for the occasion, | 0:54 | |
| as well as summarizing the general content of it. | 0:57 | |
| In the main, of course, | 1:01 | |
| the paper simply sets down in concise form | 1:03 | |
| what I have been saying on and off on these tapes | 1:07 | |
| during the past year. | 1:10 | |
| But it brings together quite a number of items. | 1:13 | |
| Let me start. | 1:16 | |
| "The topic for this session," | 1:18 | |
| I begin in my paper, | 1:20 | |
| "reminds me of the first of the four questions | 1:22 | |
| "that the youngest male at the Jewish Passover seder | 1:24 | |
| "traditionally asks the head of the household, | 1:27 | |
| "Why is this night different from all other nights? | 1:30 | |
| "In like fashion, we are asked, | 1:33 | |
| "why this recession and expansion different | 1:35 | |
| "from all other recessions and expansions. | 1:37 | |
| "It is widely believed that the answer is Yes. | 1:40 | |
| "For example, in testifying before | 1:43 | |
| "the Joint Economic Committee on July 23, 1971, | 1:45 | |
| "Arthur F. Burns remarked that, quote, | 1:49 | |
| ""The rules of economics are not working | 1:52 | |
| ""in quite the way they used to. | 1:54 | |
| ""Despite extensive unemployment in our country, | 1:56 | |
| ""wage rate increases have not moderated. | 1:58 | |
| ""Despite much idle industrial capacity, | 2:01 | |
| ""commodity prices continue to rise rapidly." | 2:04 | |
| "End quote. | 2:07 | |
| "He went on to refer to a new rigidity | 2:09 | |
| "in our economic structure. | 2:11 | |
| "Whatever may be true about the economy, | 2:14 | |
| "the propensity of economists to appeal | 2:17 | |
| "to a change in our economic structure | 2:19 | |
| "whenever they are puzzled, | 2:21 | |
| "works quite the way it used to. | 2:23 | |
| "Dr. Burns' remarks, both in phrasing and content, | 2:25 | |
| "are eerily reminiscent of statements made | 2:29 | |
| "by James Lawrence Laughlin, | 2:31 | |
| "the first chairman of the Department of Economics | 2:33 | |
| "of the University of Chicago. | 2:35 | |
| "In a paper in the 1909, | 2:37 | |
| "that's right, nineteen hundred and nine, | 2:40 | |
| "Journal of Political Economy, | 2:41 | |
| "and also at a session | 2:44 | |
| "of the nineteen hundred and ten annual meeting | 2:45 | |
| "of the American Economic Association, | 2:48 | |
| "that is a precise parallel to the present session. | 2:50 | |
| "That session 61 years ago had as its title, | 2:54 | |
| "Causes of the Changes in Prices Since 1896. | 2:57 | |
| "Laughlin and Irving Fisher were its chief protagonists. | 3:02 | |
| "Chicago vs Yale but with the sides reversed. | 3:05 | |
| "Said Laughlin, I quote, | 3:09 | |
| ""The old theory of Recardo and Hume | 3:12 | |
| ""no longer holds undisputed sway. | 3:14 | |
| ""There can be no question that the causes | 3:16 | |
| ""for the remarkable rise in prices in the past decade | 3:19 | |
| ""cannot be looked for in those influences | 3:23 | |
| ""directly affecting gold." | 3:25 | |
| "Or as we would now say, money. | 3:28 | |
| "Going on with the quote, | 3:29 | |
| ""There has been a marked advance in wages | 3:31 | |
| ""which has had its effect in raising prices. | 3:33 | |
| ""Once a high rate of wages has been granted, | 3:36 | |
| ""it is not easy for employers to force a reduction. | 3:39 | |
| ""This has been abundantly shown in the after-effects | 3:42 | |
| ""of the recent panic of 1907. | 3:45 | |
| ""There seems to be an influence independent of prices | 3:48 | |
| ""which has acted to raise the rate of wages, | 3:51 | |
| ""and that influence undoubtedly is doing | 3:54 | |
| ""greater or lesser part to the pressure of labor unions." | 3:56 | |
| "Let me interject, that when Laughlin spoke | 4:01 | |
| "there were 2.1 million members of labor unions, | 4:04 | |
| "or less than 6% of all gainful workers at the time. | 4:07 | |
| "Laughlin, like Burns, did not of course | 4:11 | |
| "restrict himself to wage push. | 4:13 | |
| "He went on to remark that, quote, | 4:15 | |
| ""The formation of combinations is unquestionably | 4:18 | |
| ""the strongest force in this period | 4:20 | |
| ""working for higher prices." | 4:22 | |
| "Unquote. | 4:24 | |
| "Again later on, quote, | 4:26 | |
| ""The whole raison d'etre of monopolistic combinations | 4:28 | |
| ""is to control prices and prevent active competition. | 4:32 | |
| ""As every economist knows, | 4:35 | |
| ""in the conditions under which | 4:37 | |
| ""many industries are today organized, | 4:38 | |
| ""expenses of production have no direct relation to prices." | 4:41 | |
| "Unquote. | 4:44 | |
| "Irving Fisher began his response, quote, | 4:46 | |
| ""I find myself unable to agree with most of the positions | 4:48 | |
| ""taken by Professor Laughlin in his able paper. | 4:52 | |
| ""In my opinion," Fisher went on, | 4:55 | |
| ""The old quantity theory is in essence correct. | 4:57 | |
| ""What it needs is to be restated, not rejected." | 5:00 | |
| "End quote. | 5:04 | |
| "And now I must cease quoting from Fisher, | 5:05 | |
| "with whom I am in full agreement, | 5:07 | |
| "and proceed instead to plagiarize him, | 5:10 | |
| "albeit with modifications to bring him down to date. | 5:13 | |
| "That economists have often believed that, | 5:17 | |
| "in Burns' words, | 5:20 | |
| ""The rules of economics are not working | 5:22 | |
| ""in quite the way they used to," | 5:24 | |
| "and have often been wrong, | 5:26 | |
| "does not of course prove that those | 5:28 | |
| "who make such assertions today are wrong." | 5:29 | |
| So I go on in the paper | 5:38 | |
| to the substance of the assignment, | 5:39 | |
| and deal with the question of monetary policy. | 5:41 | |
| And what I do is to distinguish between | 5:44 | |
| the different senses of the failure of monetary policy. | 5:46 | |
| And one sense of course is that it hasn't produced | 5:48 | |
| a heaven on earth. | 5:53 | |
| In that sense, of course it's failed, | 5:53 | |
| but that's not really a relevant sense. | 5:55 | |
| A more interesting sense | 5:57 | |
| is whether it failed in the sense | 5:59 | |
| that the doctor didn't give the right drugs, | 6:03 | |
| that the Federal Reserve didn't follow the right policy. | 6:05 | |
| Here I indicate my belief that it did not | 6:09 | |
| follow the right policy, | 6:12 | |
| but go on and spend most of my paper | 6:13 | |
| on the most important scientific sense of the term, | 6:15 | |
| namely, whether monetary policy has failed | 6:19 | |
| in the sense that the effects of monetary changes | 6:22 | |
| on economic magnitudes | 6:25 | |
| were different than might have been expected | 6:26 | |
| from past experience. | 6:28 | |
| I try to discuss that issue by presenting | 6:30 | |
| some charts that seem to me very fascinating, | 6:33 | |
| one of which I am also going to publish | 6:36 | |
| in my forthcoming Newsweek column, | 6:38 | |
| showing the rate of change of personal income | 6:41 | |
| on the one hand, | 6:45 | |
| and on the other, | 6:46 | |
| the rate of change of M2 nine months earlier, | 6:49 | |
| for the period from 1967 to 72. | 6:56 | |
| There is really a remarkable degree of relation | 6:59 | |
| between those two. | 7:01 | |
| I think no one can look at that chart | 7:02 | |
| and remain firmly embedded to the view | 7:05 | |
| that there's anything but a very close relation | 7:08 | |
| between the rate of change of the quantity of money | 7:12 | |
| on the one hand, | 7:15 | |
| and the rate of change of personal income | 7:16 | |
| at a subsequent period. | 7:17 | |
| However the real argument, I believe, | 7:19 | |
| about whether conditions have changed | 7:21 | |
| does not have anything to do with the-- | 7:23 | |
| does not have primarily to do | 7:25 | |
| with the effect of monetary and fiscal change | 7:27 | |
| on total income, | 7:29 | |
| but with the breakdown between prices and output. | 7:31 | |
| The real criticism is that | 7:37 | |
| there was not as much slow-down | 7:42 | |
| on the rate of price increase | 7:44 | |
| for the amount of monetary contraction | 7:45 | |
| as you might have expected. | 7:47 | |
| Now there's some justification in the record to this, | 7:49 | |
| for this. | 7:53 | |
| The rate of price increase was higher | 7:54 | |
| than you would have expected from past relations. | 7:57 | |
| But on detailed examination, | 7:59 | |
| what turns out to be the case | 8:00 | |
| is that on the whole the pattern | 8:02 | |
| was in accord with the past. | 8:04 | |
| What happened was that those of us like myself | 8:07 | |
| who in advance were more optimistic than was justified | 8:09 | |
| about how rapidly inflation would taper off, | 8:14 | |
| were generalizing too much from the 1966, 67 episode. | 8:20 | |
| In that episode, | 8:25 | |
| monetary restraint was followed very quickly | 8:27 | |
| by slowing down the rate of price increase, | 8:32 | |
| about the same time that production was slowed up, | 8:34 | |
| about six months after the monetary change. | 8:39 | |
| But it turns out on examining previous episodes, | 8:42 | |
| that generally speaking, | 8:46 | |
| the impact on prices is much longer delayed | 8:48 | |
| than the impact on production, | 8:51 | |
| and that I and others made a mistake | 8:53 | |
| in believing that the '66, '67 experience | 8:55 | |
| would be reproduced. | 8:58 | |
| We should have studied more carefully the earlier period. | 9:00 | |
| When you do, you find that what happened in this episode | 9:03 | |
| was that the tapering off of inflation | 9:07 | |
| came about on schedule, | 9:09 | |
| in terms of time, | 9:12 | |
| and that the tapering off of inflation was as large | 9:15 | |
| as you would have expected from earlier dates. | 9:19 | |
| However, the initial inflation | 9:21 | |
| was larger than you would have expected. | 9:24 | |
| If there be a deviation, | 9:26 | |
| it is that there was more inflation in '68 and '69 | 9:27 | |
| than you could have anticipated from earlier | 9:32 | |
| changes in the quantity of money. | 9:34 | |
| But at any rate I end up by saying that, | 9:39 | |
| "My final conclusion from this reexamination | 9:43 | |
| "of post-war experience, | 9:46 | |
| "is that monetary policy did not fail | 9:47 | |
| "in the past three years, | 9:50 | |
| "in the relevant scientific sense. | 9:51 | |
| "The drugs produced the effect to be expected, | 9:54 | |
| "though the wrong drug was administered, | 9:57 | |
| "and the patient expected it to be far more potent | 9:59 | |
| "than it was capable of being. | 10:02 | |
| "We have been driven into a widespread system | 10:05 | |
| "of arbitrary and tyrannical control | 10:07 | |
| "over our economic life, | 10:09 | |
| "not because economic laws are not working | 10:11 | |
| "the way they used to, | 10:14 | |
| "not because the classical medicine cannot, | 10:15 | |
| "if properly applied, halt inflation, | 10:18 | |
| "but because the public at large | 10:21 | |
| "has been led to expect standards of performance | 10:22 | |
| "that as economists, we do not know how to achieve. | 10:25 | |
| "Perhaps as our knowledge advances, | 10:29 | |
| "we can come closer to specifying policies | 10:31 | |
| "that would achieve these high standards. | 10:34 | |
| "Perhaps the random perturbations | 10:36 | |
| "inherent in the economic system | 10:38 | |
| "make it impossible to achieve such standards. | 10:40 | |
| "And perhaps even if there are policies | 10:43 | |
| "that would attain them, | 10:45 | |
| "considerations of political economy | 10:46 | |
| "will make it impossible for these policies to be adopted. | 10:47 | |
| "But whatever the future may hold in these respects, | 10:51 | |
| "I believe that we economists in recent years | 10:54 | |
| "have done vast harm to society at large | 10:57 | |
| "and to our profession in particular, | 11:00 | |
| "by claiming more than we can deliver. | 11:02 | |
| "We have thereby encouraged politicians | 11:05 | |
| "to make extravagant promises, | 11:07 | |
| "inculcate unrealistic expectations in the public at large, | 11:10 | |
| "and promote discontent with reasonably | 11:14 | |
| "satisfactory results, | 11:17 | |
| "because they fall short | 11:19 | |
| "of the economists' promised land." | 11:21 | |
| That's the end of the final part of my own paper. | 11:24 | |
| The other two papers on the same session | 11:27 | |
| are being given by Jack Gurley, | 11:29 | |
| who is a economist at Stanford, | 11:31 | |
| who in the past few years has become | 11:34 | |
| very much of a radical economist | 11:36 | |
| in the modern sense of that term. | 11:38 | |
| I say in the modern sense of that term | 11:40 | |
| because fundamentally I believe that-- | 11:43 | |
| I hate to see the term appropriated in that sense, | 11:48 | |
| since radical should mean going to the roots of matters, | 11:50 | |
| and unfortunately I don't think the people | 11:53 | |
| who now call themselves radical economists | 11:55 | |
| go to the roots of matters, | 11:58 | |
| they go to the trivia. | 11:59 | |
| The third paper is being given by Arthur Okun, | 12:02 | |
| who was Chairman of the Council of Economic Advisors | 12:05 | |
| in the final years of the Johnson Administration, | 12:08 | |
| and is now at the economic administration in exile, | 12:11 | |
| namely the Brookings Institution, | 12:16 | |
| which is a home for, | 12:17 | |
| in-between Democratic administrations, | 12:19 | |
| for the Democratic economists. | 12:21 | |
| They do try to get one or two Republican economists, | 12:24 | |
| just to present a front, | 12:27 | |
| but the last real one they had was Herb Stern, | 12:29 | |
| who since president Nixon has been in office of course | 12:34 | |
| has been on the council, | 12:38 | |
| and was just recently named | 12:39 | |
| Chairman of the Council of Economic Advisors | 12:41 | |
| to replace Paul McCracken, | 12:43 | |
| who is returning to the university. | 12:44 | |
| At any rate, I thought you might be interested | 12:49 | |
| if I summarize briefly | 12:52 | |
| the contents of their papers on the same topic. | 12:53 | |
| They deal with it very differently. | 12:56 | |
| Jack Gurley says the kind of questions I'm concerned with | 12:58 | |
| are really trivial questions, | 13:01 | |
| and that it involves taking the word | 13:03 | |
| for the true intention, | 13:05 | |
| that the right way to examine monitoring fiscal policy | 13:08 | |
| is not in terms of their effects on employment, | 13:11 | |
| prices, inflation, foreign balance of payments, | 13:13 | |
| but in terms of their fundamental objectives, | 13:16 | |
| which, he says, | 13:18 | |
| in a capitalist system with a capitalist government, | 13:19 | |
| is always to maintain the capitalist system | 13:23 | |
| and to promote profits for the capitalist enterprises. | 13:26 | |
| From this point of view he says that you have to give | 13:30 | |
| the policy of the last 20 years very high marks | 13:33 | |
| because it enabled profits to be maintained, | 13:35 | |
| it enabled capitalism to be maintained, | 13:39 | |
| it produced an Indochina war for the purpose | 13:42 | |
| of maintaining outlets for investment | 13:47 | |
| and enterprise for capitalism abroad, | 13:51 | |
| and that the recent episodes have been difficult | 13:55 | |
| because the fundamental forces have been | 13:58 | |
| working against this objective, | 14:01 | |
| and the promoters of the capitalist system | 14:04 | |
| have had difficulty in maintaining headway against it. | 14:07 | |
| But he says, taken on the whole, | 14:11 | |
| it's not done too badly. | 14:13 | |
| It's maintained a high enough level of unemployment, | 14:14 | |
| he claims, | 14:17 | |
| to have enabled the capitalist enterprises-- | 14:19 | |
| some of you may think this is absurd when you listen to me, | 14:22 | |
| but I give you my word that that is what he says-- | 14:25 | |
| to have enabled the capitalist enterprises | 14:29 | |
| to keep wages down and thus maintain profits up. | 14:31 | |
| He of course admits that the last few years | 14:34 | |
| have been very bad for profit, | 14:36 | |
| and he interprets the change in economic policy | 14:38 | |
| on August 15th in those lines. | 14:42 | |
| He says its real aim is as a new tack | 14:45 | |
| for holding down the poor oppressed worker, | 14:48 | |
| keeping his wages from rising, | 14:50 | |
| and thus enabling profits to soar. | 14:52 | |
| Some of the stockmarket firms, I suspect, | 14:56 | |
| ought to get hold of Mr. Gurley | 14:58 | |
| and spread his interpretation. | 15:01 | |
| To turn to the more serious of the two alternative papers, | 15:05 | |
| Art Okun's paper, | 15:10 | |
| Okun first deals with the subject | 15:11 | |
| with a very broad brush, | 15:14 | |
| and looks at the whole post-war period. | 15:15 | |
| And of course he is correct in saying | 15:17 | |
| that the performance of the economy | 15:19 | |
| in the whole past 25 years | 15:21 | |
| has been far closer to a desirable and optimal | 15:24 | |
| rate of performance than was due | 15:27 | |
| in the 25 years before the war. | 15:28 | |
| And in that sense, he argues, | 15:31 | |
| that if we take the broad view | 15:33 | |
| of monetary and fiscal policies-- | 15:35 | |
| he doesn't at this stage distinguish much between them-- | 15:37 | |
| have been a great success. | 15:40 | |
| That is entirely correct. | 15:42 | |
| When he turns and zeros down on the last two or three years, | 15:44 | |
| his verdict is quite different. | 15:48 | |
| He castigates the Nixon Administration | 15:51 | |
| for a policy of gradualism, | 15:54 | |
| and uses the three years to draw the lesson | 15:58 | |
| that what you need is a activist intervention, | 16:04 | |
| a week to week, month to month basis, | 16:09 | |
| changing the signals this way and that. | 16:11 | |
| He admits that the activist intervention | 16:15 | |
| by the new economists in the Johnson Administration | 16:18 | |
| involved some mistakes. | 16:23 | |
| He is very frank in admitting that their estimates in 1968, | 16:24 | |
| about the effect of the tax surcharge, | 16:29 | |
| and their recommendation at that time | 16:34 | |
| for a expansionary monetary policy | 16:36 | |
| to offset what they thought as a possible | 16:39 | |
| overkill effects of the surcharge, | 16:41 | |
| he admits that that was a mistake. | 16:44 | |
| But he goes on to say that after all, | 16:46 | |
| you are going to have some mistakes, | 16:48 | |
| and that if you look at the record as a whole, | 16:50 | |
| the activist policy produced good results. | 16:52 | |
| Now my quarrel with him on this subject | 16:55 | |
| is that he is taking the word for the deed. | 16:57 | |
| It is true that when Mr. Nixon came in, | 17:00 | |
| he talked about a policy of gradualism. | 17:02 | |
| But if we look at what actually happened, | 17:05 | |
| both in the field of monetary policy | 17:07 | |
| and in the field of fiscal policy, | 17:09 | |
| it was anything but a gradualistic approach. | 17:11 | |
| We have had very wide swings | 17:14 | |
| in the rate of change of the quantity of money. | 17:16 | |
| First coming down too far, | 17:19 | |
| to essentially zero in the last six months of 1969, | 17:23 | |
| then moving to a moderate but if anything | 17:28 | |
| rather high pace in 1970, | 17:31 | |
| then in the first seven months of 1971, exploding, | 17:34 | |
| then in the last five months of 1971, | 17:37 | |
| going back and swinging back to zero, | 17:41 | |
| so that as I indicated in my last tape, | 17:43 | |
| 1971 has the most erratic monetary behavior | 17:46 | |
| of any year for at least two decades or more. | 17:50 | |
| Thus, I think that the actual policy | 17:54 | |
| has been anything but the kind of gradualism | 17:57 | |
| that I among others was strongly recommended and supported | 17:59 | |
| in the beginning of the Nixon Administration. | 18:04 | |
| At any rate, those are the three rather different views | 18:08 | |
| that the audience in New Orleans will hear next week. | 18:12 | |
| - | Since our last tape, | 18:18 |
| do you see any developments in monetary policy? | 18:20 | |
| - | Yes and no. | 18:24 |
| On the one hand, the statistics about the quantity of money | 18:26 | |
| do not show any significant change. | 18:31 | |
| There was a one-week upturn and then another week downturn. | 18:34 | |
| I think it is still fair to describe | 18:39 | |
| the course of monetary growth | 18:42 | |
| as being a zero rate of growth for M1 from July to now, | 18:46 | |
| and perhaps a 4 or 5% per year rate of growth | 18:51 | |
| of M2 in that period. | 18:54 | |
| On the other hand, | 18:56 | |
| the maneuvers in the New York bond market | 18:59 | |
| by the Federal Reserve Bank of New York | 19:02 | |
| suggest that the Federal Reserve itself | 19:03 | |
| is getting extremely exercised about this pattern | 19:06 | |
| and trying to do something. | 19:08 | |
| Unfortunately, as usual, | 19:10 | |
| they're not doing something in the only way | 19:12 | |
| that would really make sense, | 19:14 | |
| namely, simply by buying on the open market. | 19:15 | |
| They're doing something by | 19:18 | |
| trying to alter interest rates again. | 19:20 | |
| They have set a repurchase interest rate | 19:24 | |
| for repurchase agreements that is extremely low, | 19:27 | |
| very much below the discount rate. | 19:32 | |
| I must say, as I watch them perform, | 19:36 | |
| I am sorry to say that I am reminded | 19:38 | |
| of my own experience in 1960, | 19:40 | |
| when in the spring of 1960, | 19:43 | |
| I went down to Washington and talked at length | 19:45 | |
| with William McChesney Martin, | 19:48 | |
| who was then Chairman of the Federal Reserve Board, | 19:50 | |
| and Robert Anderson who was then Secretary of the Treasury. | 19:53 | |
| I went down partly at the suggestion | 19:58 | |
| and through the arrangement of some of the people | 20:01 | |
| who were associated with | 20:04 | |
| then-Vice President Nixon at that time, | 20:05 | |
| because we were all concerned | 20:08 | |
| about the extent to which the Federal Reserve's | 20:10 | |
| slow-down in monetary growth in 1959 | 20:13 | |
| might be producing a recession for 1960, | 20:16 | |
| which would be adverse both the economic interests | 20:20 | |
| of the country and to Mr. Nixon's prospects for election. | 20:23 | |
| I had a long and very friendly talk with Bill Martin, | 20:27 | |
| in the course of which what I recall, | 20:33 | |
| that I am reminded of by this episode, | 20:35 | |
| was his saying to me that, | 20:37 | |
| "Of course, we don't intend | 20:39 | |
| "for the quantity of money to be going down,"-- | 20:41 | |
| I should say that at that time the quantity of money | 20:43 | |
| was actually declining absolutely, | 20:45 | |
| not merely growing at a slower rate-- | 20:47 | |
| "We don't intend for the quantity of money | 20:50 | |
| "to be going down." | 20:51 | |
| The usual canard about bringing a horse to water | 20:54 | |
| but not making him drink. | 20:58 | |
| And then he said to me, "What do you want us to do? | 20:59 | |
| "Lower the discount rate?" | 21:02 | |
| And I recall saying to him, | 21:04 | |
| "No, Mr. Martin, why don't you raise the discount rate | 21:05 | |
| "to 10% and get it out of the way, | 21:07 | |
| "so that we can get rid of the disturbances | 21:10 | |
| "that discounting brings into system. | 21:13 | |
| "What you should do is to go out and buy | 21:16 | |
| "in the open market. | 21:18 | |
| "If you just buy enough in the open market, | 21:19 | |
| "you don't have to worry. | 21:21 | |
| "The horses will drink." | 21:22 | |
| And similarly at the moment, | 21:24 | |
| it is absurd for the Fed to be engaging | 21:26 | |
| in these kinds of activities, | 21:29 | |
| via setting a three and three quarter percent rate | 21:31 | |
| on repurchase agreements | 21:34 | |
| instead of simply going out on the market, | 21:35 | |
| buying securities in such a way | 21:38 | |
| as to add to the reserves of banks, | 21:41 | |
| which will in turn lead them to expand | 21:43 | |
| and to produce the rate of growth | 21:45 | |
| and the quantity of money that is essential | 21:47 | |
| if we are not going to have a replay in 1972 | 21:53 | |
| of what happened in 1960. | 21:56 | |
| As I indicated in my past tape, | 21:58 | |
| I believe that the period of monetary stringency | 22:00 | |
| has already been long enough, | 22:03 | |
| so that we will have at the very least | 22:05 | |
| a definite tapering off in the rate of growth | 22:07 | |
| of the economy in the early part the next year. | 22:09 | |
| But if that pattern of no growth | 22:12 | |
| is continued very much longer, | 22:15 | |
| another two or three or four months, | 22:17 | |
| then we may very well see the present recovery killed, | 22:20 | |
| and not merely slowed down. | 22:24 | |
| - | Are there any further developments | 22:26 |
| on the international scene? | 22:28 | |
| - | Now that seems to be in state of quiescence at the moment. | 22:30 |
| As all of you know, | 22:35 | |
| the dollar has been being maintained | 22:39 | |
| within the new limits agreed on in Washington. | 22:43 | |
| I believe the newspapers, | 22:48 | |
| the news magazines and the rest, | 22:51 | |
| have been making much more fuss | 22:54 | |
| over the new development than is justified. | 22:57 | |
| This is perhaps stimulated and to some extent produced by | 23:00 | |
| Mr. Nixon's characteristic tendency to exaggerate | 23:04 | |
| the importance of events, | 23:07 | |
| when he said this was the most important monetary agreement | 23:08 | |
| in the history of the world, | 23:11 | |
| which is certainly very far from the case. | 23:13 | |
| Indeed, as I believe I have already said in an earlier tape, | 23:15 | |
| this monetary agreement simply formalized the status quo, | 23:21 | |
| and solves none of the really basic problems. | 23:25 | |
| By permitting a fluctuation and exchange rates | 23:29 | |
| of two and a quarter percent about the par, | 23:32 | |
| it helps a little. | 23:34 | |
| It gives a little more flexibility. | 23:35 | |
| But it will not be very long before some major currencies | 23:36 | |
| hit the boundaries of that range. | 23:41 | |
| And when they do, | 23:44 | |
| we will be back again where we were before, | 23:45 | |
| except that I believe exchange rates | 23:48 | |
| will be changed more frequently, more rapidly, | 23:51 | |
| and more easily than they have in the past. | 23:54 | |
| So on the whole, I believe that the present situation | 23:57 | |
| is not a long run, permanent, stable situation. | 24:02 | |
| However, it is a better situation | 24:07 | |
| than prevailed before August 15th, | 24:09 | |
| if only because the gold window has closed. | 24:11 | |
| There is the danger that it will be opened again | 24:14 | |
| in the long run, | 24:16 | |
| but at the moment it is closed | 24:18 | |
| and I see no prospect that it will be opened again | 24:19 | |
| in the next year or two. | 24:22 | |
| Give that that is the case, | 24:23 | |
| then it remains up to other countries to decide | 24:26 | |
| what they want to do about the dollars | 24:29 | |
| they are accumulating, | 24:31 | |
| or what they want to do | 24:32 | |
| to keep further dollars from accumulating. | 24:33 | |
| So from the U.S. point of view, | 24:36 | |
| the situation is not an unsatisfactory one. | 24:38 | |
| It would be nicer for all of us | 24:43 | |
| if more countries had followed the lead of Canada | 24:45 | |
| and continued to float their currencies. | 24:48 | |
| But what you now have is essentially, | 24:50 | |
| one way to describe it is that you have | 24:52 | |
| a continuation of dirty floats. | 24:54 | |
| What was informally a dirty float before | 24:56 | |
| has now been formally an agreed exchange rate | 25:01 | |
| with an agreed limit around it. | 25:05 | |
| - | We have a question that came in recently | 25:07 |
| which seems to be particularly appropriate | 25:11 | |
| for this Christmas season. | 25:14 | |
| "You recently made the following statement," | 25:16 | |
| a subscriber says. | 25:20 | |
| "If you look at a broad range of history, | 25:21 | |
| "it's a single-minded pursuit of the noblest motives | 25:23 | |
| "that has done the greatest harm to humanity." | 25:26 | |
| And the subscriber asks, | 25:29 | |
| "Could you please give a couple of examples | 25:32 | |
| "of what you meant by this statement?" | 25:34 | |
| - | I will give just two examples. | 25:36 |
| One is, consider Lenin, or before him Marx. | 25:38 | |
| I think it is fair to say | 25:43 | |
| that Lenin's motives were of the noblest. | 25:45 | |
| He wanted to promote the interests of the poor proletariat, | 25:48 | |
| the poor people of this earth. | 25:52 | |
| I believe in general, that the communists, | 25:55 | |
| who have done such incredible harm to individual freedom, | 25:58 | |
| to human dignity, to the nature of life, | 26:02 | |
| have been motivated, basically, | 26:05 | |
| by the noblest of motives. | 26:10 | |
| But they have also | 26:12 | |
| had a degree of intolerance and arrogance, | 26:14 | |
| which has led them to ride roughshod | 26:17 | |
| over the liberties and freedoms of individuals | 26:20 | |
| in order to attain those motives. | 26:22 | |
| A second example of a very different kind, | 26:25 | |
| but showing the same tendency, | 26:27 | |
| is given by the Spanish Inquisition. | 26:29 | |
| Here again, you had people motivated | 26:33 | |
| by the noblest of motives, | 26:36 | |
| to save souls for the Lord. | 26:37 | |
| They knew that people were going to be eternally damned, | 26:40 | |
| unless they accepted the truth. | 26:44 | |
| And it was this knowledge that made them willing, | 26:47 | |
| in the best of intentions, with the best of motives, | 26:50 | |
| to burn people at the stake, to torture them, | 26:54 | |
| in order to do good to those people themselves. | 26:57 | |
| I think these are two examples, | 27:02 | |
| but I believe there are many more that could be cited. | 27:03 | |
| - | Thank you very much, Professor Friedman. | 27:06 |
| Remember, subscribers, if you have any questions or comments | 27:08 | |
| for topics you would like to hear discussed in this series, | 27:11 | |
| please send them to Instructional Dynamics Incorporated, | 27:14 | |
| 166 East Superior Street, Chicago, Illinois, 60611. | 27:19 | |
| We hope to be visiting with you again in two weeks. | 27:24 |
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